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The Ratings Game: Dick’s Sporting Goods has momentum, but analysts anticipate that robust margins could be pinched

Raymond James admits it was wrong about Dick’s Sporting Goods Inc. and upgraded the stock to market perform from underperform after the athletic-gear retailer crushed earnings expectations.

Dick’s
DKS,
+1.14%

DKS,
+1.14%

reported record second-quarter profit and sales figures and announced a special dividend on Wednesday, and the stock finished the day up 13.3%. Shares are up 19.6% on the week and have more than doubled, gaining nearly 134%, to date in 2021. The S&P 500 index
SPX,
-0.26%

has gained 19.2% over that period.

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“[W]e have been wrong on Dick’s, as demand has remained robust longer than we anticipated and the company has consistently surpassed expectations over the past year,” analysts wrote.

Raymond James credits omnichannel investment and a change in the margin structure through efforts such as in-store pickup for online purchases, private-label launches and fewer promotions.

However, analysts say the rate of margin improvement could slow. “Impressive momentum, but peaking margins and full valuation keeps us on the sides,” wrote Wells Fargo analysts in a note.

“That said, it’s not lost on us that we are essentially in the best sporting-goods environment ever, Dick’s margins are peaking at [about] 14% in 2021 versus [a] prior peak of 9%, and Dick’s will inevitably see some normalization of demand and margins into 2022 [and] 2023.”

Wells Fargo rates Dick’s stock equal weight with a $140 price target, up from $108.

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Wedbush analysts said that, even with a more promotional environment, margins will hold up, even after surging from 5% in 2019 to a current 14%, Dick’s “believes the majority of these benefits are more structural in nature,” the analysts said.

“Even as benefits from a less promotional environment start to reverse, we still see sustainable EBT margins of [about] 11% and earnings power of $10+ in 2022.”

Dick’s is guiding for earnings per share of $11 to $11.45 for 2021.

Wedbush rates Dick’s stock outperform with a $150 price target, up from $125.

UBS analysts are also upbeat, though they maintain their neutral stock rating, raising their Dick’s share-price target to $142 from $115.

‘[W]e believe many sports are likely seeing a permanent uptick in participation,” wrote analysts led by Michael Lasser.

“Also, Dick’s is making structural improvements to its margin profile through growing private-label penetration, refining its promotional strategy, exiting the [hunting] business, and growing its e-commerce margins. As a result, we believe Dick’s is now operating off of a higher base.

Market Pulse (October 2019): Dick’s Sporting Goods junked $5 million in assault-style-rifle inventory when it stopped selling them

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